As the CFPB Studies Overdrafts, Some Say Any New Rules Could Favor Debit Volume

The Consumer Financial Protection Bureau appears to be gearing up to put more controls on bank overdraft fees. The impact of any new overdraft rules on debit cards is unknown but there’s a chance they could prove positive for transaction volume, according to one industry researcher.

The CFPB, a creation of 2010’s Dodd-Frank financial-reform law, raised the specter of more regulation on Tuesday with the release of a 72-page white paper detailing its preliminary findings about overdraft income and policies at financial institutions. The CFPB said it found wide variation among financial institutions in fees, fee policies, and operational procedures for determining account balances.

Overdrafts are closely tied to debit cards because, like checks or electronic withdrawals such as automated clearing house transactions, an ATM withdrawal or point of sale purchase can exceed the funds in the checking account, forcing the card issuer either to decline the transaction or permit it, for a fee.

Banks’ increasing reliance on overdraft-fee income, often based on poorly disclosed policies, caused an uproar a few years ago and prompted the Federal Reserve to change Regulation E to require financial institutions to have their debit card holders opt into overdraft-protection programs beginning in 2010. The rule change contrasted sharply from the usual industry practice of forcing customers to opt out of overdraft protection.

The new findings came from what the CFPB says is confidential information from a small set of large banks for the years 2010 and 2011, responses to a CFPB request for information in February 2012, and a recent study by the Independent Community Bankers of America, a small-bank trade group.

Only a small minority of debit card users—a weighted average of 16.1% for all accounts in 2011—have opted in to overdraft protection, the CFPB’s study found. Consumers with histories of overdrafts opted in at the highest rates.

“The share of accounts that had opted in to ATM/POS debit card coverage at the end of 2011 varied by 18 percentage points across study banks,” the bureau’s report says. “Opt-in rates among the study banks of accounts that were opened during 2011 were generally higher than for existing accounts and varied dramatically, ranging from single-digit percentages to more than 40%.”

The CFPB began its inquiry on grounds that despite the Reg E change, many consumers still faced high costs from overdrafts and that various regulators had addressed overdraft issues in differing ways at different times. “Our review is intended to provide the factual basis to inform efforts to develop more uniform treatment of these issues across financial institutions,” the report says.

How much financial institutions earn from overdrafts and non-sufficient funds (NSF) fees is a matter of debate. Extrapolating its survey data, the CFPB estimated consumers paid $12.6 billion in such fees in 2011, and that overdraft and NSF fees generate 61% of consumer checking-account revenue. The CFPB, however, cited data from non-study participants and industry studies in saying that “there is reason to believe that such an extrapolation would understate total industry overdraft revenue.”

Based on a first-quarter survey, bank-research firm Moebs Services, Lake Bluff, Ill., last week estimated 2013’s overdraft revenue would total $31.1 billion, down 2.8% on an annualized basis. The company’s chief executive, Michael Moebs, attributed the decline to seasonality and attempts by consumers in the face of higher taxes to limit their bank fees. Moebs also said the mean national charge for an overdraft is $29.

The CFPB report noted the differing ordering practices banks use in applying credits and debits to account ledgers in order to determine balances. Depending on how the ordering is done, the same transaction might produce an overdraft fee at one bank but not at another.

The CFPB said its next step is to continue studying the issue, but it didn’t say when it would be done or what it might ultimately conclude. “This analysis will help the CFPB assess whether further action is warranted to implement and enforce federal consumer-protection law consistently,” the report says.

Patricia Hewitt, director of the Debit Advisory Service at Mercator Advisor Group Inc., suggests three major outcomes from the CFPB’s initiative, the first being rules for the ordering process. “I think there is going to be some more proscriptive regulation around that,” she says.

Hewitt also says the CFPB could try to ban overdrafts on very small transactions, and impose a uniform policy for consumers to dispute overdraft charges.

Financial institutions not surprisingly won’t like more regulation, and requiring changes in ordering systems could be an operational burden for some, Hewitt says. But more rules won’t necessarily hurt debit card transaction volumes, she adds. “It might encourage consumers to use their debit cards more, especially if small transactions are exempted [from fees],” says Hewitt.